Sunday, August 9, 2009

A Legal High Wire Act

The drama that is the Phoenix Coyotes continues to play out in Judge Redfield Baum's bankruptcy court with his latest ruling that ALL bidders will have an opportunity to bid on the troubled franchise at a September 10th auction. The door has been opened for Jim Balsillie as Judge Baum has indicated that he will accept bids that include a relocation option. In the interim, Judge Baum will hear motions from all parties this week that will determine the conditions that will be placed on the bids and even if all potential bidders will be allowed to bid. To this end, the NHL has filed a motion to have Balsillie disqualified since the Board of Governors has unanimously rejected him as a potential owner.

There are a number of legal issues that will be considered by the court in weighing the potential bids for the Coyotes, and there is much opinion about how the court will rule on these issues. While none of us knows how the court will rule in this case, it is important to understand the central issues that confront Judge Baum. In a bankruptcy filing, the prime directive of the bankruptcy court is to maximize asset value to the benefit of the creditors. On the surface, this would appear to be the bid of Balsillie's organization, PSE, which is an all cash bid of $213MM. The other bids have been filed by Jerry Reinsdorf, is for $148MM, and offers no cash to any of the creditors, instead it is a re-work of the existing debt plus concessions from the City of Glendale on the arena lease; and Ice Edge Holdings for $150MM but has the caveat of the Coyotes playing some games in Saskatoon and other Canadian cities. Balsillie's bid would seem to be the best for the creditors and for current owner Jerry Moyes as this bid is: all cash; and allows the creditors to recover a majority of their investment.

Clouding this issue, however, is the relocation provision that Balsillie has put in on his bid. This facet of the PSE bid opens other legal considerations that must be considered by the court. First is the existing lease with the City of Glendale. The court must consider the nature of the lease and the potential financial harm to the City. Precedent in bankruptcy has been to, in most but not all cases, award a payment that is equivalent to the payment to the lessor that would have been received for one year. Jobing.com arena was specifically constructed to house the Coyotes and they serve as their anchor tenant. The loss of the hockey club will have a severe detrimental impact to the City of Glendale, and this will factor in to an evaluation of the bids that propose to keep the team in Glendale.

A potential relocation means that existing contracts are nullified. Judge Baum has already expressed his skepticism toward Balsillie's lawyers about their desire to just walk away from existing contracts that the Coyotes have in place. These include contracts such as Aramark Corporation, who is the concessionaire at Jobing.com. In a bankruptcy reorganization, the intent is maintain as reasonably as possible the existing contractual relationships that were in place prior to the bankruptcy filing. Relocation throws this consideration out the window and Judge Baum has indicated that this action is not viewed favorably by the court.

Perhaps the thorniest issue faced by the court will be interjecting itself into the inner workings of a private enterprise like the NHL. Should the franchise be awarded to PSE and allowed to relocate to Hamilton? This legal question that must be entertained is fraught with numerous landmines. Can the court tell the NHL to allow a franchise to relocate against the provisions of its charter and by-laws? Can the court tell a league to accept an owner that has been rejected? I know, the league approved Balsillie as a potential owner. In 2006. Since that time, revelations about his actions and those of his associates have come to light that has overturned that decision. Courts have been loathe to interject themselves into the operations of professional sports leagues, Al Davis and the NFL notwithstanding. Judge Baum has signaled that the NHL has a right to control its franchises and where they play. The question is will the rights of the league to operate according to its by-laws be superseded by the aims of the bankruptcy court to make creditors, as much as possible, whole.

I am certain that if the PSE does not win in the bankruptcy court, that there will be an anti-trust suit filed by Balsillie and his attorneys. This will keep the franchise in limbo for the foreseeable future and will be damaging to attempts to grow the fan base and corporate support. Balsillie has shown that he can be relentless in his pursuit of an NHL franchise and will use every method at his disposal regardless of the effect. Could the impact of years of litigation diminish the value of the franchise further? This aspect has to be taken into account by the court as it weighs the competing bids. Interestingly, while Balsillie and his lawyers argue in the Phoenix bankruptcy court that the asset that is the Coyotes should be awarded to the highest bidder with no other considerations involved, his attorneys are arguing in an Ottawa courtroom that the wireless assets of Canadian company Nortel should not be awarded to the highest bidder (in this case, Ericsson) because it is not "in Canada's interest". MP Michael Chong said to Research In Motion's co-CEO Mike Lazaridis,

"To me, there seems to be a bit of inconsistency here, because your colleague, Mr. Balsillie, has argued that under one court supervised bankruptcy proceeding in the southwest United States that the auction be awarded to the highest dollar bidder, that the successful bidder be allowed to be a foreign buyer, and that the successful bidder be allowed to move the business outside the country. Yet on the other hand, at another court supervised auction proceeding in the United States and here, you and your colleagues believe that the auction be awarded not to the highest dollar bidder and that the successful bidder not be a foreign buyer, and that the successful bidder not be allowed to move the business outside of the country. And you've put our government in a very difficult position."

Think that Balsillie, Lazaridis, and their lawyers are worried that they have put their country in a difficult position?

There will be numerous motions filed in the days leading up to the September 10th auction as lawyers for each party involved will attempt to position their client as favorably as possible. Judge Baum is on a high wire. On one side is the duty to maximize the value of the asset for the benefit of creditors and his obligation to adhere to the strictures of the bankruptcy code. On the other side is the interests of a private enterprise and the right of the league to operate its business according to its rules and control it franchises. There are numerous legal issues that must be balanced and difficult decisions to be made. And Judge Baum has no net.